Treasurer Jim Chalmers has cautiously welcomed the latest monthly consumer price index (CPI) indicator, which showed a decrease in the annual rate of headline inflation to 6.9 per cent.
The October indicator from the Australian Bureau of Statistics (ABS) was well below market expectations for a 7.6 per cent annual rise and was down from 7.3 per cent in September.
“It shows us there are reasons to be carefully optimistic, that we are getting near the inflationary peak, but we’re not there yet,” said Dr Chalmers.
The Treasurer noted that the figure does not yet fully include the price impacts of recent floods or the impact of higher energy costs in recent months.
Despite the slowdown in the monthly indicator, VanEck’s head of investment and capital markets, Russel Chesler, predicted that it is unlikely that inflation has reached its peak in Australia.
He acknowledged a number of signs that the economy may be starting to cool, including recent falls in measures of retail sales, job ads and consumer sentiment.
“However, we still have the tightest labour market in 50 years, and we are starting to see some acceleration of wage growth,” Mr Chesler added.
Australian households are cashed up, Mr Chesler said, and higher mortgage repayments have yet to deter shoppers, with retail sales still up 12.5 per cent over the last year.
“That is helping to buoy economic activity and fuel inflation, which we expect to climb to 8 per cent by the year’s end, so the RBA still has work to do,” he said.
Similarly, economists at the Commonwealth Bank said that the latest data reinforced the bank’s view that inflation will likely peak in the fourth quarter.
“The RBA will welcome the news that inflation decelerated in October, but the path from here for inflation is uncertain and is contingent on how energy prices evolve,” said CBA senior economist Kristina Clifton and economist Stephen Wu.
ANZ said that it still expects quarterly CPI to accelerate in Q4 given the inflationary effects of flooding and the delayed increase in utility CPI due to credits from state governments.
“But we’ll be keeping an eye on the data to see whether cost pass-through is easing more quickly than we have factored in and/or if the easing in global supply chain issues is showing up in the Australian data a bit earlier than we had assumed,” ANZ senior economists Catherine Birch and Felicity Emmett added.
Biggest contributors to inflation
According to the ABS, the most significant contributors to the annual rise were new dwellings (+20.4 per cent), automotive fuel (+11.8 per cent), and fruits and vegetables (+9.4 per cent).
“High levels of building construction activity and ongoing shortages of labour and materials contributed to the rise in new dwellings,” said ABS head of prices statistics Michelle Marquardt.
Automotive fuel prices increased 11.8 per cent in the year to October, up from 10.1 per cent in September, following the end of the federal government’s cut to the fuel excise.
Meanwhile, the category of food and non-alcoholic beverage prices eased from an annual rise of 9.6 per cent in September to 8.9 per cent in October.
Ms Marquardt explained that changes were made to the CPI basket during the month to ensure that it remains up-to-date and representative of current spending by households.
The most significant update to weights by the ABS related to international travel, which increased from 0.1 per cent of the CPI basket to 1.9 per cent.
“Typically, annual updates to the weights have limited impact on the overall CPI. This year, however, the significant changes in spending patterns over 2021 and 2022 meant that the reweight had a larger impact on the CPI than usual,” said Ms Marquardt.
“The annual movement of the monthly CPI indicator in October, using the previous weights, would have been 7.1 per cent compared to 6.9 per cent using the new weights.”